The principal amount of any money deposited into a qualified state tuition program is generally not taxable when withdrawn or distributed. However, the withdrawal or distribution will be taxable in the year withdrawal if:

1. you previously deducted the payments or contributions on a Colorado income tax return, and
2. the withdrawal is not made for one of the following purposes:
   • To pay qualified higher education expenses (as defined in section 529(e)(3) of the Internal Revenue Code),
   • As a result of the beneficiarys death or disability, or
   • As a result of receiving a scholarship and as long as the amount of distribution, refunds, or withdrawals made do not exceed the amount of the scholarship provided during such tax year.

The amount of any taxable withdrawal or distribution must be added to taxable income on Form 104 on the "Other additions" line in the year the distribution is received.

Similarly, if you use these funds to pay the education expenses of someone other than the designated beneficiary, the funds become taxable in Colorado -- even if the expenses otherwise qualify as higher educational expenses.

Interest and other income distributed from a qualified state tuition program may, under certain circumstances, be included in federal taxable income in the year of distribution.

For tax years beginning on or after January 1, 1998, you can subtract this income on your Colorado income tax return if the interest and other income is included in your federal taxable income and you use the distribution to pay qualified higher educational expenses of the designated beneficiary. [C.R.S. 39-22-104 (4) (i)]. This subtraction is reported on the "Other subtractions" line of the Colorado income tax return Form 104.

For tax years beginning on or after January 1, 2002, distributions from qualified State tuition programs will no longer qualify for this subtraction. For tax years beginning on or after January 1, 2004, distributions from qualified tuition programs established and maintained by an entity other than a State (or agency or instrumentality thereof) will no longer qualify for this subtraction. This is because the distributions will no longer be included in federal taxable income in those years.

• May purchase tuition credits or certificates on behalf of a designated beneficiary which entitle the beneficiary to the waiver or payment of qualified higher education expenses of the beneficiary, or
• May make contributions to an account which is established for the purpose of paying the qualified higher education expenses of the designated beneficiary of the account, and meets the other requirements in section 529 of the Internal Revenue Code.